SME Growth Stall – The 100 Person Ceiling

Small firm growth tends to stall when their staff levels reach about 100 employees.  Understanding this phenomena is important because Canada’s economic growth depends heavily on creating more medium firms (2.6% of all firms) that generate 12-14% of GDP, 16% of jobs, invest more in R&D, and are better able to export and compete internationally.

Why Growth Stalls At Around 100 Employees

Many small firms are led by an owner/founder leveraging a local personal network to drive business growth. The business owner/founder is heavily involved in the day-to-day business and become overwhelmed. Churchill & Lewis explored management issues of SME growth in their seminal 1983 HBR paper The Five Stages of Small Business Growth. They explored how the demands on owner/founder become limiting as the firm grows requiring disengagement, delegation, and added systems to manage growing complexity. Owner/founders who choose not to disengage, working at their personal capacity, limit any further growth and the firm continues in a marginally surviving mode market demand conditions permitting.

Sutton and Rao have provided new perspective on the problem of growth in their book Scaling Up Excellence: Getting To More Without Selling For Less. Sutton & Rao review the key research underpinning ‘the problem of more’ driving extra burden, higher cognitive load, labour efficiency, communication, coordination, and ‘grooming’ as firms grow.  In particular they quoted work by Oxford anthropologist Robin Dunbar who determined that “when an organization reaches about 150 people the communication and coordination demand outstrips what the human mind can handle”. Sutton & Rao observe that “some leaders and teams handle growth and program expansion and others do not”.

How Can Leaders Overcome This Hurdle

Sutton & Rao provide some powerful advice with excellent examples to help small business leadership grow effectively assuming that they take the decision to disengage if they are the owner/founder. Their advice centers around building a “better organizational operating system” coined from Salesforce.com that moves accountability from the growing senior management to smaller teams that held team leaders and members more accountable. Sutton & Rao identified five tactics to employ to manage “the problem of more”:

  • Subtraction – Subtraction is the removal of “crummy or useless rules, tools, and fools that clog up the works and cloud people’s minds”. Subtraction includes simplifying standard work by working through a learning process of “simplistic-complex-profoundly simple” because to get to “profoundly simple” teams often need to understand the complexity.
  • Make People Squirm – Sutton & Rao suggest that everyone need to challenge the status quo to make subtraction work. This tactic relies on the broad field of change management.
  • Load Busters – Load busters are “simple additions of objects, activities, and technologies that cut cognitive load” by focussing on “what matters most and away from what matters least”. This tactic works when as firms get more complex staff can loose perspective on what is important for good business health.
  • Divide and Conquer – This tactic improves coordination and accountability by dividing the organization into smaller groups. This tactic relies on the benefits of teams.
  • Bolster Collective Brainpower – This tactic is based on “sticking with savvy insiders and stable teams and blending people who have worked together before” as teams are added rather than relying on outsiders.

Sutton & Rao also suggest that as the organization grows that there is a balance to be continuously managed between too much/little complexity, too much/little management, too much/little bureaucracy. They suggest give ground grudgingly adopting “the Goldilocks Theory of Bureaucracy” of “injecting just enough structure , hierarchy, and process at the right time”. Using a Salesfore.com approach of “running a little hot” giving staff the flexibility to operate more freely and accountable while not running the operation too close to 100% capacity  beyond their cognitive and emotional limits.

Founder/Owners of small firms who have reached the 100 person ceiling but are hesitant in taking the next step should read Sutton & Rao’s book.  The case examples are excellent and practical tips plentiful to provide helpful guidance to chart a way forward.

 

 

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